Do I pay tax on any gains if I subdivide before 10 years ownership?

Question from Long updated on 18th November 2010:

Hi, if you buy a property for rental income and after say 4 years you decide that you want to subdivide the back section to build another house and sell that house; will you need to pay tax on the profit from the new house? At the time of the purchase of the original property, it was intended only as a long term rental property. The original house will not be sold and kept as a rental property.

Our expert Mark Withers responded:

Yes, the gain is almost certainly taxable under section CB12 which taxes gains made where taxpayers develop or divide property within 10 years of acquisition and the work is considered to be more than of a minor nature. Even if you had simply sibdivided and sold the section without building the house this would probably be work of more than a minor nature. Note, there are exemptions from this section where the home being subdivided is your own residence or where the subdivision / development is done to enable you to derive more rental income but the bottom line is that if you do it to sell within 10 years of acquisition any gain is assessable.

Note also that having developed and divided the property you are left with what we call the "residual land problem" ie the potential for the original dwelling to also be taxable when it sells because despite the fact that you are still renting it you can't change the fact that it was " developed and divided within 10 years of acquisition". In these circumstances your intention at acquisition is completely irrelevant. Remember though that just because it's taxable doesn't necessarily mean you shouldn't do it. Just make sure you factor the tax in when you do your numbers and decide if it is worth your while. 

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.


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